Monday, February 1, 2016

Teach Your Kids They Can't Time the Market (And They Don't Have To)

If the kids overhear investment “experts” blathering on TV in the background during breakfast, they might be picking up the subliminal message that people actually know what’s going to happen in the stock market.

Time to let your kids in on the big secret: nobody really knows where the market is headed and when. Here’s a good example from the article: dudes in fancy suits from Merrill Lynch projected that energy stocks would perform well in 2015. Ummm...down 25% instead. Doh!

Explain to your kids that when people try to time the market, studies show they invariably perform worse than just leaving their investments alone. Why? Natural human emotion. They feel jealous when the market climbs, so the buy. They feel fearful when the market drops, so they sell. Buy high, sell low. Ooops, that’s the opposite of what you’re supposed to do!

Now let your kids in on the good news: you don’t have to time the market. Just buy at regular intervals over long periods, and you’re bound to get lucky at least some of the time. That’s called dollar cost averaging. You’ll do fine over the long term.

“Why buy stocks at all?’ your kids ask. Because over the long term (there’s that phrase again!), the stock market generally outperforms all the other places you can stash your money.

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